Morningstar: CMBS Delinquency Rate Cracks 3% Threshold

The commercial mortgage-backed securities loan delinquency rate rose above 3.0 percent for the first time since January, registering 3.03 percent, reported Morningstar, Chicago.

The delinquency rate increased 13 basis points from September to October, Morningstar said. More than 67 percent of newly delinquent loans came from the 2006 vintage and many of the maturing loans written at the height of the market had difficulty refinancing because they remain overleveraged, Morningstar reported.

“Morningstar expects the maturity payoff rate will slide further, and pressure the delinquency rate, as many of the loans coming due next year were underwritten in 2007 with optimistic cash flow projections that did not materialize,” the agency said. 

By collateral type, weakness remained concentrated in office and retail, with 5-plus percent delinquency rates in both property type’s balance. The combined office and retail delinquent unpaid balance accounts for more than 70 percent of the delinquent universe. 

But Fitch Ratings, New York, gave the office sector a “Stable” outlook. “Overall fundamentals are stable, with continued pockets of concern, including Houston and Denver for example, which are subject to rising sublease space caused by sustained low oil prices, and tech-heavy markets due to unsustainable rent growth,” Fitch’s CMBS Market Trends report said. “Continued positive momentum in monthly job gains are leading to more office-using employment. Overall rents are trending higher due to tightening conditions in select markets and leasing activity on new central business district, Class A space.”

Fitch gave the retail sector a “Static” rating. “Net absorption declined from the second quarter and absorption levels remain low by historical standards,” the rating agency said, noting that national neighborhood and community center vacancy experienced a slight 10 basis point uptick to 10 percent, returning to year-end 2015 levels after improving slightly during the second quarter. 

Morningstar estimated that the CMBS loan payoff rate will finish the year between 70 percent and 75 percent, “We expect the CMBS payoff rate to drift to 60 percent or below next year amid a preponderance of over-leveraged office and retail loans that were loosely underwritten near the top of the market with aggressive rent growth projections, low capitalization rates and high loan-to-value ratios.”